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OUR PERSPECTIVES

The SEC Climate Disclosure Rule is finally out. Now what?



After two years of deliberation, the Securities and Exchange Commission adopted and issued its final rule on climate disclosure requirements this morning by a vote of 3-2.


As a reminder, the SEC climate disclosure proposed rule, announced in 2022, proposed to update and strengthen the existing SEC climate disclosure rule, requiring public companies to disclose more detailed information about their climate-related risks and opportunities. The proposed rule would require companies to report their Scope 1, 2, and 3 greenhouse gas emissions, and disclose the potential financial impacts of climate-related risks such as physical risks, transitional risks, and litigation risks. The SEC also proposed that companies provide information on their climate-related governance, strategy, and risk management practices.


The proposed rule received over 15,000 comments- the most ever received for a single proposal - and ongoing pressure from environmental groups and the business community since the proposed rule was released.


Despite years of companies preparing themselves for a regulatory regime under the proposed rule, the final version is quite different. The SEC issued an 886-page rule that mandate companies disclose Scope 1 and 2 emissions when these emissions are material but does not include Scope 3 (downstream emissions) requirements. The reporting requirements for Scope 1 and 2 are watered down from the proposed rule by linking requirements to how material each emissions category is to investors.


So what comes next?


Litigation:


We expect the SEC rule to immediately be met with lawsuits from groups like the Chamber of Commerce and state attorneys general very soon. Look to the Chamber of Commerce and CalChamber lawsuit in California as a template for arguments that the SEC will face.


On the other side, Sierra Club and EarthJustice have threatened to take SEC to court for the rule not going far enough They plan to show that the majority of comments submitted on the proposal endorsed Scope 3 reporting and SEC has weakened the rule against stakeholders’ demands. 


Congressional Reaction:


Republicans and moderate Democrats have pushed back on the proposed rule. Republicans have used this issue as a rallying cry for government overreach. The House Financial Services Committee had an entire month called “ESG month” where Republicans advanced legislation to limit ESG practices within the government and private sector. Both chambers have sent multiple letters to the SEC warning of overreach. Expect Republicans to use this rule as a rallying cry throughout campaign season to call for rolling back SEC’s authority over corporate disclosures.

 

Meanwhile, Senators Jon Tester (D-MT), Joe Manchin (D-WV), and Kyrsten Sinema (I-AZ) have raised concerns around requiring Scope 3 reporting.


Democrats, like Rep. Sean Casten (D-IL), Sen. Sheldon Whitehouse (D-RI), and Sen. Elizabeth Warren (D-MA), have established themselves as leaders on ESG-related issues. Expect these policymakers to work closely with green groups and environmentally oriented business groups to push back on the SEC for weakening the final rule.

 

Business Impact:


Last year, the California governor signed two climate disclosure bills into law – Senate Bill 253 and Senate Bill 261. These landmark bills will require companies operating in California with revenue over $1 billion to report on Scope 1, 2, and 3 emissions annually and companies operating in the state bringing in over $500 million in revenue must release biannual reports disclosing financial risks of climate change.


Blue states who want to be seen as leaders on climate issues are already following. New York, Washington, Illinois, and Oregon are all considering versions of the California bills to require companies operating in their states to comply. 


Meanwhile, the European Union’s Corporate Sustainability Reporting Directive (CSRD) went into effect at the beginning of last year. This law requires large American companies operating in the EU and all EU-listed companies to disclose Scope 1, 2, and 3 emissions.

 

Just because the SEC rule is finalized, the debate on climate disclosures is not over. Implementing this rule will depend on a number of political factors, such as who controls the White House next year. Additionally, states will play an outsized role in determining the future of climate disclosure requirements and the SEC will need to figure out the role it plays within the broader context.

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